Recession fears return to haunt economies across Europe

The eurozone will enter a period of stagnation rather than a contraction, economists believe

Britain’s private-sector companies shed workers at the fastest pace since the pandemic and the depths of the financial crisis.

Private-sector activity in the eurozone has continued to shrink in September, suggesting the economy contracted in the current quarter. 

Despite dodging a recession in the wake of Russia’s invasion of Ukraine, the euro region is struggling under the weight of higher energy prices, a surge in borrowing costs and waning demand in export markets like China. 

While there is agreement the eurozone is going through a rough patch, the European Central Bank’s latest forecasts still see the third quarter as a stagnation — not a contraction. 

“We expect the eurozone to enter a contraction in the third quarter,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. 

The region’s two biggest economies were the key drivers of the downturn in activity, according to S&P Global. While the slump eased in Germany, it deepened in France. Economists had expected momentum in both countries to remain broadly stable. 

Meanwhile, Britain’s private-sector companies shed workers at the fastest pace since the pandemic and the depths of the financial crisis, underscoring the Bank of England’s decision to halt interest rate increases for the first time in almost two years.

S&P Global’s composite Purchasing Managers’ Index slipped in September, but marking the sharpest decline in output since January 2021 when the UK was in lockdown. The reading was worse than economists expected and plunged the private sector deeper into contraction territory.

The survey was cited in the Bank of England's decision to hold interest rates at 5.25% as evidence that Britain’s already sputtering economy was weakening. 

The PMI survey adds to a growing list of indicators that point to a lacklustre second half of the year for the economy. Retail sales data also showed a smaller-than-expected bounce back in August. 

“A recession is looking increasingly likely in the UK,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. 

“A major concern in the inflation outlook has been wage growth, but with the survey now signalling the sharpest fall in employment since 2009, wage bargaining power is being eroded rapidly.” 

S&P also said there had been an “abrupt turnaround” in the jobs market, with staff cuts the fastest since October 2009, excluding lockdowns during the pandemic.

“It’s clear from the weak survey data this morning that the effect of the prior interest rate hikes is starting to bite,” said Mike Bell, global liquidity market strategist at JP Morgan Asset Management. 

• Bloomberg